82 FR 16638 - Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change To (1) Implement the Margin Proxy, (2) Modify the Calculation of the Coverage Charge in Circumstances Where the Margin Proxy Applies, and (3) Make Certain Technical Corrections
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 64 (April 5, 2017)
Federal Register Volume 82, Issue 64 (April 5, 2017)
| Page Range | 16638-16642 | |
| FR Document | 2017-06685 |
[Federal Register Volume 82, Number 64 (Wednesday, April 5, 2017)] [Notices] [Pages 16638-16642] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-06685] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80349; File No. SR-FICC-2017-001] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change To (1) Implement the Margin Proxy, (2) Modify the Calculation of the Coverage Charge in Circumstances Where the Margin Proxy Applies, and (3) Make Certain Technical Corrections March 30, 2017. I. Introduction Fixed Income Clearing Corporation (``FICC'') filed with the Securities and Exchange Commission (``Commission'') on February 2, 2017 the proposed rule change SR-FICC-2017-001 (``Proposed Rule Change'') pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed Rule Change was published for comment in the Federal Register on February 9, 2017.\3\ The Commission received three comment letters \4\ to the Proposed Rule Change, including a response letter from FICC. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. FICC also filed this proposal as an advance notice pursuant to Section 802(e)(1) of the Payment, Clearing, and Settlement Supervision Act of 2010 and Rule 19b- 4(n)(1) under the Act. 15 U.S.C. 5465(e)(1) and 17 CFR 240.19b- 4(n)(1). The advance notice was published for comment in the Federal Register on March 2, 2017. See Securities Exchange Act Release No. 80139 (March 2, 2017), 82 FR 80139 (March 8, 2017) (SR-FICC-2017- 801) (``Advance Notice''). The Commission did not receive any comments on the Advance Notice. \3\ Securities Exchange Act Release No. 79958 (February 3, 2017), 82 FR 10117 (February 9, 2017) (SR-FICC-2017- 001)(``Notice''). \4\ See letter from Robert E. Pooler, Chief Financial Officer, Ronin Capital LLC (``Ronin''), dated February 24, 2017, to Eduardo A. Aleman, Assistant Secretary, Commission (``Ronin Letter''); letter from Alan Levy, Managing Director, Industrial and Commercial Bank of China Financial Services LLC (``ICBCFS''), dated February 24, 2017, to Commission (``ICBCFS Letter''); and Timothy J. Cuddihy, Managing Director, FICC, dated March 8, 2017, to Eduardo A. Aleman, Assistant Secretary, Commission (``FICC Letter'') available at https://www.sec.gov/comments/sr-ficc-2017-001/ficc2017001.htm. --------------------------------------------------------------------------- II. Description of the Proposed Rule Change The Proposed Rule Change proposes several amendments to the FICC Government Securities Division (``GSD'') Rulebook (``GSD Rules'') \5\ designed to provide FICC with a supplemental means to calculate the VaR Charge component of its GSD Netting Members' (``Netting Members'') daily margin requirement, known as the ``Required Fund Deposit.'' Specifically, under the proposal, FICC would include a minimum volatility calculation for a Netting Member's VaR Charge called the ``Margin Proxy.'' FICC represents that the Margin Proxy would enhance the risk-based model and parameters that FICC uses to establish Netting Members' Required Fund Deposits by enabling FICC to better identify the risk posed by a Netting Member's unsettled portfolio. --------------------------------------------------------------------------- \5\ Available at http://www.dtcc.com/en/legal/rules-and-procedures. --------------------------------------------------------------------------- A. Overview of the Required Fund Deposit According to FICC, a key tool it uses to manage market risk is the daily calculation and collection of Required Fund Deposits from its Netting Members. The Required Fund Deposit is intended to mitigate potential losses to FICC associated with liquidation of such Netting Member's accounts at GSD that are used for margining purposes (``Margin Portfolio'') in the event that FICC ceases to act for such Netting Member (referred to as a Netting Member ``Default''). A Netting Member's Required Fund Deposit consists of several components, including the VaR Charge and the Coverage Charge. The VaR Charge comprises the largest portion of a Netting Member's Required Fund [[Page 16639]] Deposit amount and is calculated using a risk-based margin methodology model that is intended to cover the market price risk associated with the securities in a Netting Member's Margin Portfolio. That risk-based margin methodology model, which FICC refers to as the ``Current Volatility Calculation,'' uses historical market moves to project the potential gains or losses that could occur in connection with the liquidation of a defaulting Netting Member's Margin Portfolio. The Coverage Charge is calculated based on the Netting Member's daily backtesting results conducted by FICC. Backtesting is used to determine the adequacy of each Netting Member's Required Fund Deposit and involves comparing the Required Fund Deposit for each Netting Member with actual price changes in the Netting Member's Margin Portfolio. The Coverage Charge is incorporated in the Required Fund Deposit for each Netting Member, and is equal to the amount necessary to increase that Netting Member's Required Fund Deposit so that the Netting Member's backtesting coverage may achieve the 99 percent confidence level required by FICC (i.e., two or fewer backtesting deficiency days in a rolling twelve-month period). B. Proposed Change to the Existing VaR Charge Calculation Under the proposal, FICC would create the Margin Proxy, a new, benchmarked volatility calculation of the VaR Charge. The Margin Proxy would act as an alternative to the Current Volatility Calculation of the VaR Charge to provide a minimum volatility calculation for each Netting Member's VaR Charge. FICC proposes to use the Margin Proxy as the VaR Charge if doing so would result in a higher Required Fund Deposit for a Netting Member than using the Current Volatility Calculation as the VaR Charge. In addition, as described in more detail below, because FICC's testing shows that the Margin Proxy would, by itself, achieve a 99 percent confidence level for Netting Members' backtesting coverage when used in lieu of the Current Volatility Charge, in the event that FICC uses the Margin Proxy as the VaR Charge for a Netting Member, it would reduce the Coverage Charge for that Netting Member by a commensurate amount, as long as the Coverage Charge does not go below zero. According to FICC, during the fourth quarter of 2016, its Current Volatility Calculation did not respond effectively to the level of market volatility at that time, and its VaR Charge amounts (calculated using the profit and loss scenarios generated by the Current Volatility Calculation) did not achieve backtesting coverage at a 99 percent confidence level,\6\ which resulted in backtesting deficiencies for the Required Fund Deposit beyond FICC's risk tolerance.\7\ FICC's calculation of the Margin Proxy is designed to avoid such deficiencies. The Margin Proxy provides FICC with an alternative calculation of the VaR Charge to the Current Volatility Calculation of the VaR Charge. In particular, the Margin Proxy is likely to be used when the Current Volatility Calculation is lower than volatility from certain benchmarks (i.e., market price volatility from corresponding U.S. Treasury and to- be-announced (``TBA'') \8\ securities benchmarks.\9\ The Margin Proxy separately calculates U.S. Treasury securities and agency pass-through mortgage backed securities (``MBS''). According to FICC, the historical price changes of these two asset classes are different due to market factors such as credit spreads and prepayment risk.\10\ This would allow FICC to monitor the performance of each of those asset classes individually.\11\ By using separate calculations for the two asset classes, the Margin Proxy would cover the historical market prices of each of those asset classes, on a standalone basis, to a 99 percent confidence level. --------------------------------------------------------------------------- \6\ Notice, 82 FR at 10118. \7\ Id. \8\ FICC states that specified pool trades are mapped to the corresponding positions in TBA securities for determining the VaR Charge. \9\ Notice, 82 FR at 10118. \10\ Id. \11\ Id. --------------------------------------------------------------------------- The Margin Proxy would be calculated per Netting Member, and each security in a Netting Member's Margin Portfolio would be mapped to a respective benchmark based on the security's asset class and maturity.\12\ All securities within each benchmark would be aggregated into a net exposure.\13\ Once the net exposure is determined, FICC would apply an applicable haircut \14\ to each benchmark's net exposure to determine the net price risk for each benchmark (``Net Price Risk''). Finally, FICC would separately determine the asset class price risk (``Asset Class Price Risk'') for U.S. Treasury and MBS benchmarks by aggregating the respective Net Price Risk for each benchmark. To provide risk diversification across tenor buckets for the U.S. Treasury benchmarks, the Asset Class Price Risk calculation includes a correlation adjustment that has been historically observed across the U.S. Treasury benchmarks. According to FICC, the Margin Proxy would thereby represent the sum of the U.S. Treasury and MBS Asset Class Price Risk.\15\ FICC would compare the Margin Proxy to the Current Volatility Calculation for each asset class and then apply whichever is greater as the VaR Charge for each Netting Member's Margin Portfolio. --------------------------------------------------------------------------- \12\ According to FICC, U.S. Treasury and agency securities would be mapped to a U.S. Treasury benchmark security/index, while MBS would be mapped to a TBA security/index. \13\ Net exposure is the aggregate market value of securities to be purchased by the Netting Member minus the aggregate market value of securities to be sold by the Netting Member. \14\ The haircut is calculated using historical market price changes of the respective benchmark to cover the expected market price volatility at 99 percent confidence level. \15\ Notice, 82 FR at 10119. --------------------------------------------------------------------------- FICC expresses confidence that this proposal would provide the adequate VaR Charge for each Netting Member because its calculations show that including the Margin Proxy results in backtesting coverage above the 99 percent confidence level for the past four years.\16\ Additionally, FICC asserts that, by using industry-standard benchmarks that can be observed by Netting Members, the Margin Proxy would be transparent to Netting Members.\17\ --------------------------------------------------------------------------- \16\ Id. \17\ Id. --------------------------------------------------------------------------- FICC further asserts that the Margin Proxy methodology would be subject to performance reviews by FICC. Specifically, FICC would monitor each Netting Member's Required Fund Deposit and the aggregate FICC GSD clearing fund (``Clearing Fund'') requirements and compare them to the requirements calculated by the Margin Proxy. Consistent with the current GSD Rules,\18\ FICC would review the robustness of the Margin Proxy by comparing the results versus the three-day profit and loss of each Netting Member's Margin Portfolio based on actual market price moves. If the Margin Proxy's backtesting results do not meet FICC's 99 percent confidence level, FICC states that it would consider adjustments to the Margin Proxy, including increasing the look-back period and/or applying a historical stressed period to the Margin Proxy calibration, as appropriate.\19\ --------------------------------------------------------------------------- \18\ See definition of VaR Charge in GSD Rule 1, Definitions, supra note 5. \19\ Notice, 82 FR at 10119. --------------------------------------------------------------------------- C. Proposed Modification to the Coverage Charge When the Margin Proxy Is Applied FICC also proposes to modify the calculation of the Coverage Charge when the Margin Proxy is applied as the VaR Charge. Specifically, FICC would [[Page 16640]] reduce the Coverage Charge by the amount that the Margin Proxy exceeds the sum of the Current Volatility Calculation and Coverage Charge, but not by an amount greater than the total Coverage Charge. FICC states that its backtesting analysis demonstrates that the Margin Proxy, on its own, achieves the 99 percent confidence level without the inclusion of the Coverage Charge.\20\ FICC would not modify the Coverage Charge if the Margin Proxy is not applied as the VaR Charge. --------------------------------------------------------------------------- \20\ Id. at 10119. Future adjustments to the Margin Proxy could require the filing of a new proposed rule change. --------------------------------------------------------------------------- D. Technical Corrections FICC also proposes technical corrections to the GSD Rules. Specifically, FICC proposes to: (1) Capitalize certain words in the definition of VaR Charge in Rule 1 in order to reflect existing defined terms; (2) add ``Netting'' before ``Member'' in the definition of VaR Charge to reflect the application of the VaR Charge on Netting Members; and (3) correct typographical errors in Section 1b(a) of Rule 4. III. Summary of Comments Received The Commission received three comment letters in response to the proposal. Two comment letters--the Ronin Letter and the ICBCFS Letter-- raise concerns with respect to the proposal's design and transparency,\21\ while the Ronin Letter also criticizes the proposal for a potential anti-competitive impact.\22\ Additionally, both the Ronin Letter and ICBCFS Letter raise a concern that falls outside the scope of the Commission's review of the Proposed Rule Change.\23\ The third comment letter is FICC's response to those concerns. The Commission has reviewed and taken into consideration each of the comments received and addresses the comments below insofar as they relate to the standard of review for a proposed rule change. --------------------------------------------------------------------------- \21\ See Ronin Letter at 1-10; ICBCFS Letter at 1-3. \22\ See Ronin Letter at 2, 9. \23\ See Ronin Letter at 3; ICBCFS Letter at 1-2. Specifically, Ronin and ICBCFS disapprove of FICC's request for an accelerated regulatory review process. FICC responds that it sought accelerated review to rectify deficiencies with its margin calculations as quickly as possible to avoid exposing its Netting Members to the risk that a defaulting Netting Member will not be sufficiently covered by margin. The Commission notes that neither Ronin nor ICBCFS suggest how this concern relates to the Proposed Rule Change's consistency with the Act--the standard by which the Commission must evaluate a proposed rule change. See 15 U.S.C. 78s(b)(2)(C). The Commission also notes, as a matter of fact, that neither the Proposed Rule Change nor the related Advance Notice were approved on an accelerated basis. --------------------------------------------------------------------------- A. Comments Regarding the Proposal's Design Ronin questions the justification for imposing the Margin Proxy, particularly: (i) The need for the VaR Charge to address idiosyncratic risk (referencing the 2016 U.S. presidential election), and (ii) if the volatility around the 2016 U.S. presidential election was sufficiently extreme to warrant the creation of the Margin Proxy.\24\ In response, FICC reiterates that the Margin Proxy's primary goal is to achieve a 99 percent backtesting confidence level for all members.\25\ FICC observes that, while recent dates from the fourth quarter of 2016 (including the 2016 U.S. Presidential election) indicate that the VaR Charge, on its own, is not always sufficient to ensure that the 99 percent coverage threshold is met,\26\ inclusion of the Margin Proxy results in a backtesting confidence level above 99 percent for the past four years, demonstrating that the Margin Proxy accomplishes its primary goal.\27\ --------------------------------------------------------------------------- \24\ Ronin Letter at 1, 6. \25\ See FICC Letter at 4. \26\ See id. at 2. \27\ Id. at 4. --------------------------------------------------------------------------- ICBCFS disagrees with certain technical aspects of the proposal. In particular, it: (i) Questions the inclusion of ten years of pricing data in the proposed Margin Proxy calculation, including the 2007-2009 period; (ii) disagrees with the Margin Proxy's netting of both sides of a repurchase transaction; and (iii) raises concerns on how the proposed Margin Proxy groups securities in a Netting Member's Margin Portfolio in a way that could increase its margin.\28\ --------------------------------------------------------------------------- \28\ ICBCFS Letter at 2. --------------------------------------------------------------------------- In response to the questions regarding the inclusion of ten years of pricing data, FICC states that using the proposed look-back period would help to ensure that the Margin Proxy, and as a result, the VaR Charge, does not either (i) decrease as quickly during intervals of low volatility, or (ii) increase as sharply in crisis periods, resulting in more stable VaR estimates that adequately reflect extreme market moves.\29\ With respect to ICBCFS's concerns with offsetting positions in transaction, FICC notes that the Margin Proxy uses a similar approach for offsetting positions as in the Current Volatility Calculation.\30\ In response to ICBCFS' concerns about increased margin due to the Margin Proxy's benchmarking, FICC responds that the circumstance that ICBCFS cited would not result in a higher margin, as the Margin Proxy would benchmark securities within the same asset class and maturity (and long and short positions within such benchmarks would be offset).\31\ --------------------------------------------------------------------------- \29\ FICC Letter at 4. \30\ Id. \31\ Id. --------------------------------------------------------------------------- B. Comments Regarding the Proposal's Transparency Ronin and ICBCFS argue that the proposal is not sufficiently transparent because it does not include sufficient information for them to determine the proposal's impact on their margin calculations.\32\ In response, FICC states that it (i) provided all GSD Netting Members with a two-month impact study reflecting the impact of the Margin Proxy on the VaR Charge and Coverage Charge (before and after the U.S. presidential election), and (ii) responded to individual Netting Member requests for additional data and information.\33\ FICC also notes that it will continue to engage in ongoing dialogue with Netting Members in order to help Netting Members gauge the individual impact of the proposed margin methodology changes.\34\ --------------------------------------------------------------------------- \32\ See Ronin Letter at 3; ICBCFS Letter at 1-3. \33\ FICC Letter at 2-3. \34\ Id. at 3-4. --------------------------------------------------------------------------- C. Comments Regarding the Proposal's Burden on Competition Finally, Ronin argues that the proposal imposes a burden on competition because it may cause Ronin to pay more margin. Ronin notes that the Margin Proxy creates an ``unfair competitive burden'' among Netting Members with different access to capital.\35\ In response, FICC posits that, given the Netting Members' different costs of capital, the Margin Proxy's potential increase of additional margin could be anti- competitive.\36\ However, FICC does not believe that the Margin Proxy would impose a significant burden on competition. Specifically, FICC notes that any increase in a Netting Member's Required Fund Deposit would (i) be in direct relation to that Netting Member's portfolio market risk, and (ii) be calculated with the same parameters and confidence level for all Netting Members.\37\ Further, FICC states that any increase in a Netting Member's Required Fund Deposit because of the Margin Proxy would be ``necessary to assure the safeguarding of the securities and funds that are in FICC's possession [[Page 16641]] and cover FICC's risk exposure to its [Netting] Members.'' \38\ --------------------------------------------------------------------------- \35\ Ronin Letter at 2. \36\ Id. at 9. \37\ FICC Letter at 5. \38\ Id. at 5. --------------------------------------------------------------------------- IV. Discussion and Commission Findings Section 19(b)(2)(C) of the Act \39\ directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. --------------------------------------------------------------------------- \39\ 15 U.S.C. 78s(b)(2)(C). --------------------------------------------------------------------------- The Commission finds that the Proposed Rule Change described above is consistent with the Act, in particular Sections 17A(b)(3)(F) and (b)(3)(I) of the Act,\40\ and Rules 17Ad-22(b)(1),\41\ (b)(2),\42\ and (d)(1) \43\ under the Act. --------------------------------------------------------------------------- \40\ 15 U.S.C. 78q-1(b)(3)(F). \41\ 17 CFR 240.17Ad-22(b)(1). \42\ 17 CFR 240.17Ad-22(b)(2). \43\ 17 CFR 240.17Ad-22(d)(1). --------------------------------------------------------------------------- Section 17A(b)(3)(F) of the Act requires that the rules of the clearing agency must be designed to, among other things, assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible.\44\ As described above, the proposal would enhance the risk-based model and parameters that establish daily margin requirements for Netting Members by enabling FICC to better identify the risk posed by a Netting Member's unsettled portfolio and to increase FICC's collection of margin when the Margin Proxy calculation exceeds the Current Volatility Calculation. As such, the proposal would help ensure that the Required Fund Deposit that FICC collects from Netting Members is sufficient to mitigate FICC's credit exposure to potential losses arising from the default of a Netting Member. Therefore, the Commission believes that the proposed rule changes associated with the Margin Proxy and Coverage Charge would help safeguard securities and funds that are in the custody or control of FICC, consistent with Section 17A(b)(3)(F) of the Act. --------------------------------------------------------------------------- \44\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- Section 17A(b)(3)(F) of the Act also requires that the rules of a registered clearing agency promote the prompt and accurate clearance and settlement of securities transactions.\45\ As described above, the proposal includes technical corrections to address typographical errors and capitalize terms so that existing defined terms are accurately referenced and used in the applicable rule provisions. As such, the proposal would help ensure that the GSD Rules remain accurate and clear, which would help to avoid potential interpretation differences and possible disputes between FICC and its Netting Members. Thus, Commission believes that the proposed rule changes associated with the technical corrections would promote the prompt and accurate clearance and settlement of securities transactions, consistent with Section 17A(b)(3)(F) of the Act. --------------------------------------------------------------------------- \45\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- Section 17A(b)(3)(I) of the Act requires that the rules of a registered clearing agency do not impose any burden on competition not necessary or appropriate in furtherance of the Act.\46\ As stated above, the Proposed Rule Change could increase the amount of margin that FICC collects in certain circumstances, which would help ensure that the Required Fund Deposit that FICC collects from Netting Members is sufficient to mitigate the credit risk presented by the Netting Members. While Ronin argues that such an increase in its margin may be anticompetitive (because Netting Members have different costs of capital),\47\ the Commission believes that the potential increase in a Netting Member's Required Fund Deposit as a result of this proposal would be necessary and appropriate in furtherance of the Act because it would be (i) commensurate with that Netting Member's risk profile, (ii) calculated using the same parameters for all Netting Members, and (iii) designed to ensure that FICC has sufficient margin to limit its exposure to potential losses resulting from the default of a Netting Member. Thus, Commission believes that the proposed rule change would not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act, consistent with Section 17A(b)(3)(I) of the Act. --------------------------------------------------------------------------- \46\ 15 U.S.C. 78q-1(b)(3)(I). \47\ Ronin Letter at 9. --------------------------------------------------------------------------- Rule 17Ad-22(b)(1) under the Act requires a registered clearing agency that performs central counterparty services to establish, implement, maintain, and enforce written policies and procedures reasonably designed to measure its credit exposures to its participants at least once a day and limit its exposures to potential losses from defaults by its participants under normal market conditions so that the operations of the clearing agency would not be disrupted and non- defaulting participants would not be exposed to losses that they cannot anticipate or control.\48\ The proposed Margin Proxy would be used daily to help measure FICC's credit exposure to Netting Members. While ICBCFS raises concerns about including the 2007-2009 period, as noted above, the Commission agrees that this look back period should help FICC better monitor the credit exposures presented by its Netting Members by including volatile periods. It should also enhance FICC's overall risk-based margining framework by helping to ensure that the calculation of each GSD Netting Member's Required Fund Deposit would be sufficient to allow FICC to use the defaulting member's own Required Fund Deposit to limit its exposures to potential losses associated with the liquidation of such member's portfolio in the event of a GSD Netting Member default under normal market conditions. Therefore, the Commission believes that the proposal is consistent with the requirements of Rule 17Ad-22(b)(1).\49\ --------------------------------------------------------------------------- \48\ 17 CFR 240.17Ad-22(b)(1). \49\ Id. --------------------------------------------------------------------------- Rule 17Ad-22(b)(2) under the Act requires a registered clearing agency that performs central counterparty services to establish, implement, maintain, and enforce written policies and procedures reasonably designed to use margin requirements to limit its credit exposures to participants under normal market conditions and use risk- based models and parameters to set margin requirements and review such margin requirements and the related risk-based models and parameters at least monthly.\50\ The proposed changes would enhance the risk-based model and parameters that establish daily margin requirements for Netting Members by enabling FICC to better identify the risk posed by a Netting Member's unsettled portfolio and to quickly adjust and collect additional deposits as needed to cover those risks. Because the proposed changes are designed to calculate each Netting Member's Required Fund Deposit at a 99 percent confidence level, the proposal also should help mitigate losses to FICC and its members, in the event that such Netting Member defaults under normal market conditions. Therefore, the Commission believes that the proposal is consistent with the requirements of Rule 17Ad-22(b)(2).\51\ --------------------------------------------------------------------------- \50\ 17 CFR 240.17Ad-22(b)(2). \51\ Id. --------------------------------------------------------------------------- Rule 17Ad-22(d)(1) under the Act requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to, among other things, provide for a well-founded, transparent, and enforceable legal framework for each aspect of its [[Page 16642]] activities in all relevant jurisdictions.\52\ While Ronin and ICBCFS argue that the proposal is not sufficiently transparent because it does not include sufficient information for them to determine the proposal's impact on their margin calculations,\53\ the Commission understands that FICC has provided Netting Members with information to allow them to understand the impact of the Margin Proxy on their VaR Charge and Coverage Charge, and that FICC responded to individual Netting Member requests for additional data and information.\54\ Moreover, the Commission understands that FICC will continue to engage in ongoing dialogue with Netting Members in order to help Netting Members gauge the individual impact of the proposed margin methodology changes.\55\ Therefore, the Commission believes that the proposal is reasonably designed to provide for a well-founded, transparent, and enforceable legal framework, consistent with Rule 17Ad-22(d)(1).\56\ --------------------------------------------------------------------------- \52\ 17 CFR 240.17Ad-22(d)(1). \53\ See Ronin Letter at 3; ICBCFS Letter at 1-3. \54\ See FICC Letter at 2-3. \55\ See id. at 3-4. \56\ 17 CFR 240.17Ad-22(d)(1). --------------------------------------------------------------------------- V. Conclusion On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\57\ that proposed rule change SR-FICC-2017-001 be, and it hereby is, approved as of the date of this order or the date of a notice by the Commission authorizing FICC to implement FICC's advance notice proposal SR-FICC-2017-801 that is consistent with this proposed rule change, whichever is later.\58\ --------------------------------------------------------------------------- \57\ 15 U.S.C. 78s(b)(2). \58\ In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\59\ --------------------------------------------------------------------------- \59\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-06685 Filed 4-4-17; 8:45 am] BILLING CODE 8011-01-P
![16638 Federal Register / Vol. 82, No. 64 / Wednesday, April 5, 2017 / Notices
Exchange Act of 1934 (15 U.S.C. 78a et estimate of the burden of the proposed was published for comment in the
seq.). The Commission plans to submit collection of information; (c) ways to Federal Register on February 9, 2017.3
this existing collection of information to enhance the quality, utility, and clarity The Commission received three
the Office of Management and Budget of the information collected; and (d) comment letters 4 to the Proposed Rule
(‘‘OMB’’) for extension and approval. ways to minimize the burden of the Change, including a response letter from
Rule 17a–5 is the basic financial collection of information on FICC.
reporting rule for brokers and dealers.1 respondents, including through the use
The rule requires the filing of Form X– II. Description of the Proposed Rule
of automated collection techniques or
17A–5, the Financial and Operational Change
other forms of information technology.
Combined Uniform Single Report Consideration will be given to The Proposed Rule Change proposes
(‘‘FOCUS Report’’), which was the result comments and suggestions submitted in several amendments to the FICC
of years of study and comments by writing within 60 days of this Government Securities Division
representatives of the securities industry publication. (‘‘GSD’’) Rulebook (‘‘GSD Rules’’) 5
through advisory committees and An agency may not conduct or designed to provide FICC with a
through the normal rule proposal sponsor, and a person is not required to supplemental means to calculate the
methods. The FOCUS Report was respond to, a collection of information VaR Charge component of its GSD
designed to eliminate the overlapping under the PRA unless it displays a Netting Members’ (‘‘Netting Members’’)
regulatory reports required by various currently valid OMB control number. daily margin requirement, known as the
self-regulatory organizations and the Please direct your written comments ‘‘Required Fund Deposit.’’ Specifically,
Commission and to reduce reporting to: Pamela Dyson, Director/Chief under the proposal, FICC would include
burdens as much as possible. The rule Information Officer, Securities and a minimum volatility calculation for a
also requires the filing of an annual Exchange Commission, c/o Remi Pavlik- Netting Member’s VaR Charge called the
audited report of financial statements. Simon, 100 F Street NE., Washington, ‘‘Margin Proxy.’’ FICC represents that
The FOCUS Report consists of: (1) DC 20549, or send an email to PRA_ the Margin Proxy would enhance the
Part I, which is a monthly report that Mailbox@sec.gov. risk-based model and parameters that
must be filed by brokers or dealers that FICC uses to establish Netting Members’
Dated: March 30, 2017.
clear transactions or carry customer Required Fund Deposits by enabling
securities; (2) one of three alternative Eduardo A. Aleman,
FICC to better identify the risk posed by
quarterly reports: Part II, which must be Assistant Secretary. a Netting Member’s unsettled portfolio.
filed by brokers or dealers that clear [FR Doc. 2017–06695 Filed 4–4–17; 8:45 am]
transactions or carry customer BILLING CODE 8011–01–P
A. Overview of the Required Fund
securities; Part IIA, which must be filed Deposit
by brokers or dealers that do not clear According to FICC, a key tool it uses
transactions or carry customer SECURITIES AND EXCHANGE to manage market risk is the daily
securities; and Part IIB, which must be COMMISSION calculation and collection of Required
filed by specialized broker-dealers [Release No. 34–80349; File No. SR–FICC– Fund Deposits from its Netting
registered with the Commission as OTC 2017–001] Members. The Required Fund Deposit is
derivatives dealers; 2 (3) supplemental intended to mitigate potential losses to
schedules, which must be filed Self-Regulatory Organizations; Fixed FICC associated with liquidation of such
annually; and (4) a facing page, which Income Clearing Corporation; Order Netting Member’s accounts at GSD that
must be filed with the annual audited Approving a Proposed Rule Change To are used for margining purposes
report of financial statements. Under the (1) Implement the Margin Proxy, (2) (‘‘Margin Portfolio’’) in the event that
rule, a broker or dealer that computes Modify the Calculation of the Coverage FICC ceases to act for such Netting
certain of its capital charges in Charge in Circumstances Where the Member (referred to as a Netting
accordance with Appendix E to Margin Proxy Applies, and (3) Make Member ‘‘Default’’).
Exchange Act Rule 15c3–1 must file Certain Technical Corrections A Netting Member’s Required Fund
additional monthly, quarterly, and Deposit consists of several components,
March 30, 2017.
annual reports with the Commission. including the VaR Charge and the
The Commission estimates that the I. Introduction Coverage Charge. The VaR Charge
total hours burden under Rule 17a–5 is comprises the largest portion of a
approximately 356,020 hours per year Fixed Income Clearing Corporation
(‘‘FICC’’) filed with the Securities and Netting Member’s Required Fund
when annualized, and the total cost
burden under Rule 17a–5 is Exchange Commission (‘‘Commission’’)
The Commission did not receive any comments on
approximately $45,133,148 per year. on February 2, 2017 the proposed rule the Advance Notice.
Written comments are invited on: (a) change SR–FICC–2017–001 (‘‘Proposed 3 Securities Exchange Act Release No. 79958
Whether the proposed collection of Rule Change’’) pursuant to Section (February 3, 2017), 82 FR 10117 (February 9, 2017)
19(b)(1) of the Securities Exchange Act (SR–FICC–2017–001)(‘‘Notice’’).
information is necessary for the proper 4 See letter from Robert E. Pooler, Chief Financial
performance of the functions of the of 1934 (‘‘Act’’) 1 and Rule 19b–4
Officer, Ronin Capital LLC (‘‘Ronin’’), dated
Commission, including whether the thereunder.2 The Proposed Rule Change February 24, 2017, to Eduardo A. Aleman, Assistant
information shall have practical utility; Secretary, Commission (‘‘Ronin Letter’’); letter from
1 15 U.S.C. 78s(b)(1). Alan Levy, Managing Director, Industrial and
(b) the accuracy of the Commission’s 2 17 CFR 240.19b–4. FICC also filed this proposal Commercial Bank of China Financial Services LLC
jstallworth on DSK7TPTVN1PROD with NOTICES
as an advance notice pursuant to Section 802(e)(1) (‘‘ICBCFS’’), dated February 24, 2017, to
1 Rule 17a–5(c) requires a broker or dealer to Commission (‘‘ICBCFS Letter’’); and Timothy J.
of the Payment, Clearing, and Settlement
furnish certain of its financial information to Supervision Act of 2010 and Rule 19b–4(n)(1) Cuddihy, Managing Director, FICC, dated March 8,
customers and is subject to a separate PRA filing under the Act. 15 U.S.C. 5465(e)(1) and 17 CFR 2017, to Eduardo A. Aleman, Assistant Secretary,
(OMB Control Number 3235–0199). 240.19b–4(n)(1). The advance notice was published Commission (‘‘FICC Letter’’) available at https://
2 Part IIB of Form X–17A–5 must be filed by OTC for comment in the Federal Register on March 2, www.sec.gov/comments/sr-ficc-2017–001/
derivatives dealers under Exchange Act Rule 17a– 2017. See Securities Exchange Act Release No. ficc2017001.htm.
12 and is subject to a separate PRA filing (OMB 80139 (March 2, 2017), 82 FR 80139 (March 8, 5 Available at http://www.dtcc.com/en/legal/
control number 3235–0498). 2017) (SR–FICC–2017–801) (‘‘Advance Notice’’). rules-and-procedures.
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![Federal Register / Vol. 82, No. 64 / Wednesday, April 5, 2017 / Notices 16641
and cover FICC’s risk exposure to its remain accurate and clear, which would Members. While ICBCFS raises concerns
[Netting] Members.’’ 38 help to avoid potential interpretation about including the 2007–2009 period,
differences and possible disputes as noted above, the Commission agrees
IV. Discussion and Commission
between FICC and its Netting Members. that this look back period should help
Findings
Thus, Commission believes that the FICC better monitor the credit exposures
Section 19(b)(2)(C) of the Act 39 proposed rule changes associated with presented by its Netting Members by
directs the Commission to approve a the technical corrections would promote including volatile periods. It should also
proposed rule change of a self- the prompt and accurate clearance and enhance FICC’s overall risk-based
regulatory organization if it finds that settlement of securities transactions, margining framework by helping to
the proposed rule change is consistent consistent with Section 17A(b)(3)(F) of ensure that the calculation of each GSD
with the requirements of the Act and the the Act. Netting Member’s Required Fund
rules and regulations thereunder Section 17A(b)(3)(I) of the Act Deposit would be sufficient to allow
applicable to such organization. requires that the rules of a registered FICC to use the defaulting member’s
The Commission finds that the clearing agency do not impose any
Proposed Rule Change described above own Required Fund Deposit to limit its
burden on competition not necessary or exposures to potential losses associated
is consistent with the Act, in particular appropriate in furtherance of the Act.46
Sections 17A(b)(3)(F) and (b)(3)(I) of the with the liquidation of such member’s
As stated above, the Proposed Rule portfolio in the event of a GSD Netting
Act,40 and Rules 17Ad–22(b)(1),41 Change could increase the amount of
(b)(2),42 and (d)(1) 43 under the Act. Member default under normal market
margin that FICC collects in certain
Section 17A(b)(3)(F) of the Act conditions. Therefore, the Commission
circumstances, which would help
requires that the rules of the clearing believes that the proposal is consistent
ensure that the Required Fund Deposit
agency must be designed to, among with the requirements of Rule 17Ad–
that FICC collects from Netting
other things, assure the safeguarding of Members is sufficient to mitigate the 22(b)(1).49
securities and funds which are in the credit risk presented by the Netting Rule 17Ad–22(b)(2) under the Act
custody or control of the clearing agency Members. While Ronin argues that such requires a registered clearing agency
or for which it is responsible.44 As an increase in its margin may be that performs central counterparty
described above, the proposal would anticompetitive (because Netting services to establish, implement,
enhance the risk-based model and Members have different costs of maintain, and enforce written policies
parameters that establish daily margin capital),47 the Commission believes that and procedures reasonably designed to
requirements for Netting Members by the potential increase in a Netting use margin requirements to limit its
enabling FICC to better identify the risk Member’s Required Fund Deposit as a credit exposures to participants under
posed by a Netting Member’s unsettled result of this proposal would be normal market conditions and use risk-
portfolio and to increase FICC’s necessary and appropriate in based models and parameters to set
collection of margin when the Margin furtherance of the Act because it would margin requirements and review such
Proxy calculation exceeds the Current be (i) commensurate with that Netting margin requirements and the related
Volatility Calculation. As such, the Member’s risk profile, (ii) calculated risk-based models and parameters at
proposal would help ensure that the using the same parameters for all least monthly.50 The proposed changes
Required Fund Deposit that FICC Netting Members, and (iii) designed to would enhance the risk-based model
collects from Netting Members is ensure that FICC has sufficient margin and parameters that establish daily
sufficient to mitigate FICC’s credit to limit its exposure to potential losses margin requirements for Netting
exposure to potential losses arising from resulting from the default of a Netting Members by enabling FICC to better
the default of a Netting Member. Member. Thus, Commission believes identify the risk posed by a Netting
Therefore, the Commission believes that that the proposed rule change would not Member’s unsettled portfolio and to
the proposed rule changes associated impose any burden on competition not quickly adjust and collect additional
with the Margin Proxy and Coverage necessary or appropriate in furtherance
Charge would help safeguard securities deposits as needed to cover those risks.
of the purposes of the Act, consistent Because the proposed changes are
and funds that are in the custody or with Section 17A(b)(3)(I) of the Act.
control of FICC, consistent with Section designed to calculate each Netting
Rule 17Ad–22(b)(1) under the Act Member’s Required Fund Deposit at a
17A(b)(3)(F) of the Act. requires a registered clearing agency
Section 17A(b)(3)(F) of the Act also 99 percent confidence level, the
that performs central counterparty proposal also should help mitigate
requires that the rules of a registered services to establish, implement,
clearing agency promote the prompt and losses to FICC and its members, in the
maintain, and enforce written policies event that such Netting Member defaults
accurate clearance and settlement of and procedures reasonably designed to
securities transactions.45 As described under normal market conditions.
measure its credit exposures to its Therefore, the Commission believes that
above, the proposal includes technical participants at least once a day and limit
corrections to address typographical the proposal is consistent with the
its exposures to potential losses from
errors and capitalize terms so that requirements of Rule 17Ad–22(b)(2).51
defaults by its participants under
existing defined terms are accurately normal market conditions so that the Rule 17Ad–22(d)(1) under the Act
referenced and used in the applicable operations of the clearing agency would requires a registered clearing agency to
rule provisions. As such, the proposal not be disrupted and non-defaulting establish, implement, maintain and
would help ensure that the GSD Rules participants would not be exposed to enforce written policies and procedures
jstallworth on DSK7TPTVN1PROD with NOTICES
losses that they cannot anticipate or reasonably designed to, among other
38 Id.at 5.
39 15 control.48 The proposed Margin Proxy things, provide for a well-founded,
U.S.C. 78s(b)(2)(C).
40 15 U.S.C. 78q–1(b)(3)(F). would be used daily to help measure transparent, and enforceable legal
41 17 CFR 240.17Ad–22(b)(1). FICC’s credit exposure to Netting framework for each aspect of its
42 17 CFR 240.17Ad–22(b)(2).
43 17 CFR 240.17Ad–22(d)(1). 46 15 U.S.C. 78q–1(b)(3)(I). 49 Id.
44 15 U.S.C. 78q–1(b)(3)(F). 47 Ronin Letter at 9. 50 17 CFR 240.17Ad–22(b)(2).
45 15 U.S.C. 78q–1(b)(3)(F). 48 17 CFR 240.17Ad–22(b)(1). 51 Id.
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![16642 Federal Register / Vol. 82, No. 64 / Wednesday, April 5, 2017 / Notices
activities in all relevant jurisdictions.52 SECURITIES AND EXCHANGE ADDRESSES: Secretary, U.S. Securities
While Ronin and ICBCFS argue that the COMMISSION and Exchange Commission, 100 F Street
proposal is not sufficiently transparent NE., Washington, DC 20549–1090;
because it does not include sufficient [Investment Company Act Release No. Applicants: Dory S. Black, Esq.,
information for them to determine the 32584; File No. 812–14636] President, c/o Angel Oak Capital
proposal’s impact on their margin Advisors, LLC, One Buckhead Plaza,
calculations,53 the Commission Angel Oak Funds Trust and Angel Oak 3060 Peachtree Rd. NW., Suite 500,
understands that FICC has provided Capital Advisors, LLC Atlanta, Georgia 30305.
Netting Members with information to FOR FURTHER INFORMATION CONTACT:
March 30, 2017.
allow them to understand the impact of Steven I. Amchan, Senior Counsel, at
AGENCY: Securities and Exchange
the Margin Proxy on their VaR Charge (202) 551–6826 or David J. Marcinkus,
Commission (‘‘Commission’’).
and Coverage Charge, and that FICC Branch Chief, at (202) 551–6821
ACTION: Notice. (Division of Investment Management,
responded to individual Netting
Member requests for additional data and Chief Counsel’s Office).
Notice of an application for an order
information.54 Moreover, the pursuant to: (a) Section 6(c) of the SUPPLEMENTARY INFORMATION: The
Commission understands that FICC will Investment Company Act of 1940 following is a summary of the
continue to engage in ongoing dialogue (‘‘Act’’) granting an exemption from application. The complete application
with Netting Members in order to help sections 18(f) and 21(b) of the Act; (b) may be obtained via the Commission’s
Netting Members gauge the individual section 12(d)(1)(J) of the Act granting an Web site by searching for the file
exemption from section 12(d)(1) of the number, or an applicant using the
impact of the proposed margin
Act; (c) sections 6(c) and 17(b) of the Company name box, at http://
methodology changes.55 Therefore, the
Act granting an exemption from sections www.sec.gov/search/search.htm or by
Commission believes that the proposal
17(a)(1), 17(a)(2) and 17(a)(3) of the Act; calling (202) 551–8090.
is reasonably designed to provide for a SUMMARY OF THE APPLICATION:
well-founded, transparent, and and (d) section 17(d) of the Act and rule
17d–1 under the Act to permit certain 1. Applicants request an order that
enforceable legal framework, consistent would permit the applicants to
with Rule 17Ad–22(d)(1).56 joint arrangements and transactions.
Applicants request an order that would participate in an interfund lending
V. Conclusion permit certain registered open-end facility where each Fund could lend
management investment companies to money directly to and borrow money
On the basis of the foregoing, the participate in a joint lending and directly from other Funds to cover
Commission finds that the proposal is borrowing facility. unanticipated cash shortfalls, such as
consistent with the requirements of the unanticipated redemptions or trade
APPLICANTS: Angel Oak Funds Trust, a
Act and in particular with the fails.1 The Funds will not borrow under
Delaware statutory trust registered the facility for leverage purposes and
requirements of Section 17A of the Act under the Act as an open-end
and the rules and regulations the loans’ duration will be no more than
management series investment 7 days.2
thereunder. company, and Angel Oak Capital 2. Applicants anticipate that the
It is therefore ordered, pursuant to Advisors, LLC (the ‘‘Adviser’’), a proposed facility would provide a
Section 19(b)(2) of the Act,57 that Delaware limited liability company borrowing Fund with a source of
proposed rule change SR–FICC–2017– registered as an investment adviser liquidity at a rate lower than the bank
001 be, and it hereby is, approved as of under the Investment Advisers Act of borrowing rate at times when the cash
the date of this order or the date of a 1940. position of the Fund is insufficient to
notice by the Commission authorizing FILING DATES: The application was filed meet temporary cash requirements. In
FICC to implement FICC’s advance on April 1, 2016, and amended on addition, Funds making short-term cash
notice proposal SR–FICC–2017–801 that September 30, 2016 and February 6, loans directly to other Funds would
is consistent with this proposed rule 2017. earn interest at a rate higher than they
change, whichever is later.58 HEARING OR NOTIFICATION OF HEARING: otherwise could obtain from investing
For the Commission, by the Division of
An order granting the requested relief their cash in repurchase agreements or
Trading and Markets, pursuant to delegated will be issued unless the Commission certain other short term money market
authority.59 orders a hearing. Interested persons may instruments. Thus, applicants assert that
request a hearing by writing to the the facility would benefit both
Eduardo A. Aleman,
Commission’s Secretary and serving borrowing and lending Funds.
Assistant Secretary. applicants with a copy of the request, 3. Applicants agree that any order
[FR Doc. 2017–06685 Filed 4–4–17; 8:45 am] personally or by mail. Hearing requests granting the requested relief will be
BILLING CODE 8011–01–P should be received by the Commission
by 5:30 p.m. on April 24, 2017 and 1 Applicants request that the order apply to the
should be accompanied by proof of applicants and to any existing or future registered
open-end management investment company or
52 17
service on the applicants, in the form of series thereof for which the Adviser or any
CFR 240.17Ad–22(d)(1).
53 See
an affidavit, or, for lawyers, a certificate successor thereto or an investment adviser
Ronin Letter at 3; ICBCFS Letter at 1–3.
54 See FICC Letter at 2–3.
of service. Pursuant to Rule 0–5 under controlling, controlled by, or under common
the Act, hearing requests should state control with the Adviser or any successor thereto
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55 See id. at 3–4.
serves as investment adviser (each a ‘‘Fund’’ and
56 17 CFR 240.17Ad–22(d)(1).
the nature of the writer’s interest, any collectively the ‘‘Funds’’ and each such investment
57 15 U.S.C. 78s(b)(2). facts bearing upon the desirability of a adviser an ‘‘Adviser’’). For purposes of the
58 In approving this proposed rule change, the hearing on the matter, the reason for the requested order, ‘‘successor’’ is limited to any entity
request, and the issues contested. that results from a reorganization into another
Commission has considered the proposed rule’s jurisdiction or a change in the type of a business
impact on efficiency, competition, and capital Persons who wish to be notified of a organization.
formation. See 15 U.S.C. 78c(f). hearing may request notification by 2 Any Fund, however, will be able to call a loan
59 17 CFR 200.30–3(a)(12). writing to the Commission’s Secretary. on one business day’s notice.
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Document Created: 2018-02-01 14:47:18
Document Modified: 2018-02-01 14:47:18
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 82 FR 16638 |
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